US

There have been two topics concerning the yield curve in the press over the last few days, which we think merit closer attention. As regular readers will know, the US yield curve in particular is closely followed by market participants and can dictate a lot of what happens in fixed income markets globally.

When the Fed announced last month that it would be buying investment grade corporate bonds, it was said to have thrown the kitchen sink at the coronavirus problem. After this latest move, there are holes where the kitchen cabinets used to be.

At any other time, record issuance and record outflows in US investment grade would each be worthy of attention. Given the havoc COVID-19 has wreaked in recent weeks, it would be tempting to write off these milestones occurring in parallel last week as merely the latest quirk of an unprecedented period for bond markets, but the reasons behind this apparent sentiment split are worth keeping an eye on.

Yesterday we blogged on how European HY had always led recoveries in UK equities this century, and that even more so this time around we expect the same to happen.

With markets in turmoil and economies around the world shutting down to slow the spread of COVID-19, many investors have been looking to the US to lead the stimulus effort on both the monetary and fiscal policy front. This week they may have got it.

For participants in financial markets a liquidity squeeze that lasts for a prolonged period is one of the most difficult environments to cope with. Correlations break down, markets trade in a vacuum, small trades lead to disproportionate price moves, relative value goes out of the window, panic sets in, selling is indiscriminate. This is where we have been for the last two weeks. So we thought we would share some of these experiences with you and try to rationalise why it is happening and when it might end.

While the European bond market was setting records last week, the US market has also begun 2020 with a flurry of transactions backed up by record inflows.

Fixed income investors are well versed in the risks of ‘fallen angels’, investment grade companies whose bonds tumble in value once they are downgraded to high yield.

It was a dramatic night last night as the Fed cut interest rates by 25bps, the first cut since December 2008, along with the premature ending to the balance sheet run off – however markets hardly moved!

The dust is slowly settling after Wednesday’s FOMC rate decision, and more importantly the following press conference where Chairman Jerome Powell literally talked the market down.

“This time next year, Rodney…”

It is that time of year when we traditionally look ahead to the new year and make predictions on the performance of various asset classes, sectors and industries.